Understanding an experience modification factor and its impact on your district

Understanding an experience modification factor and its impact on your district

By Marsh McLennan
Marsh McLennan is the MSBA Insurance Trust Endorsed Provider for Property-Casualty and Workers’ Compensation insurance and risk management services

Your school’s experience modification rating (EMR) needs to be checked periodically. The EMR is the indicator of your costs for work injuries, and it may be higher than you want.

By taking steps to reduce injuries and their costs, you can lower your EMR, which can directly impact your workers’ compensation premium and your bottom line.

What is an Experience Modification Rating (EMR)?

A rate used by insurance companies that takes into consideration the employer’s size (determined by payroll), past loss experience (typically three years of loss data) based on industry (utilizing class codes) to understand the risk of the company. This rate helps assess how much premium should be tied into the risk. The lower the EMR, the lower the insurance premium will be.

Core Definitions of an Experience Modification Rating (EMR) that Impact the Outcome

  • Payrolls generate expected losses that are determined by which class code their employees are within (how much losses are expected based off their industry and size).
  • Expected loss rates are rates determined by state specific actuaries on an annual basis that investigate how each class code is performing.
  • Actual loss amount are losses reported by the carrier that only includes claims with medical and indemnity loss amounts (does not include expenses). There is a loss amount limit by state as to how much each claim can impact the EMR.
  • Primary losses are losses that are up to a limit defined by each state and is typically within the first $17,500 of a claim. These primary losses are weighted more heavily than losses over this amount.
  • Injury code is a code that determines if a claim has lost time (indemnity) or strictly medical only payments or reserves.

Four Common Contributing Factors

1. The class code tied into the payroll(s) contributes significantly to how an experienced modification rating is being performed compared to their peers. When an insured’s payroll increases or decreases it will alter the outcome of the modification rating. Each class code is tied into an expected loss rate (ELR) to which is determined by state actuaries on an annual basis. If the actuaries determine that the performance (or risk) has changed, then an update to the ELR for all the years included will be made and reflected.

In the example below (see charts for 2023 vs. 2024), the below school district in 2023 had an ELR of 0.18 for class code 8868 and in 2024 that same class code went down to 0.14 resulting in a change from $36,000 to $28,000 in expected losses. A drop of $8,000 for this one year and one class code. The same scenario for class code 7380 and 9101 resulted in a total decrease of $16,915 in expected losses for the full year. Please note that the example below only includes one of the three years that are typically included in an EMR calculation.

2. Frequency and severity of claims within your experience modification rating is another contributing factor. Frequency is determined by claims within the primary loss limit. Primary losses go into the rating calculation at the full value versus loss amounts over the primary (called excess loss amount). Excess loss amounts go into the rating on a percentage basis that is determined by the insured’s size (called the weight value). This excess amount of loss determines the experience modification rate’s severity. For example, if five claims valued at $20,000 (total of $100,000) went into the rating, then the current primary loss limit of $17,500 would apply to each claim. This would allow $87,500 (5 x $17,500) of primary loss amounts to go into the EMR calculation at the full value and only $12,500 ($100,000 – $87,500) of excess loss amount to go into the EMR calculation at a percentage basis (typically at around 20% to 30% for school sizes and is found under the Weight Value). However, if we had one claim valued at $100,000, then only $17,500 would go in at the full value and $82,500 would be reduced by the percentage basis (Weight Value). This is why frequency impacts EMR more than severity.

3. A loss amount that is strictly medical only is reduced within the rating by 70% (in most states). This includes medical paid and medical reserves. If the loss amount has indemnity (or lost time) paid or indemnity reserves, then the loss amount goes into the rating at the full value (up to the loss limitations). Expenses are not included in the calculation of the EMR.

4. Loss limitations are also a strong contributing factor that determines the outcome of the experience rating. As noted above, losses are limited based on each state’s actuarial advisement. For an example, in Minnesota the loss limitation per claim in 2023 was $242,500 and currently in 2024 the loss limitation has decreased to $122,500. Also, the primary loss limitation (also known as the split-point) went from $18,500 to $17,500 in Minnesota. This reduction in loss limits is intended to help alleviate the drops in ELRs.

New Experience Modification Rate Rule Changes in 2024

The bureaus who collect the data from the carriers to promulgate insured’s individual EMRs have been looking into creating a more accurate, consistent, and credible depiction of how each state’s industry has been performing based on their loss history.

The following changes are in effect in Minnesota (on January 1, 2024) and Wisconsin (on October 1, 2024) and beyond.

  • Primary/excess loss limitations (split point)
  • Update to the state per claim limitation
  • Weight and Ballast factors consistency by state exposures
  • Primary expected loss rate consistency

These changes are not expected to adjust the outcome of the experience modification factor formula (from a collective perspective) but to improve overall performance of the experience modification rating.

From MMA’s Analyst’s Perspective on the 2024 Changes

We have seen that most class codes in Minnesota and Wisconsin have a decreased expected loss rate (ELR). This decrease has resulted in lower expected loss amounts causing an impact on the experience modification rate. If losses and payrolls stay the same, then the insured’s experience modification factor increases solely due to the ELR change. Even though the new changes stated above resulted in lower loss limitations in these states, we still have seen higher experience modification rates for clients that were already over the industry average from a year ago. If a client was under the industry average, then we’ve seen a slight decrease in experience modification rates.

From a school district perspective, we took an experience modification rate worksheet from the upcoming 2024 policy term that had losses below the proposed loss limitation in Minnesota of $122,500 and reverted that same loss data and payroll data to 2023 rates and found that the modification rate increased by 10 points based on the changes discussed above. However, if the same scenario had a loss above the 2023 loss limitation ($242,500), the impact was only 4 points. This is due to the loss limitation going from $242,500 to $122,500; the amount of the claim going into the EMR was reduced by $120,000 because of the loss limitation change.

By taking steps to avoid and minimize injuries and costs, you, your insurance provider, and your broker can achieve the greatest impact to your EMR. You’ll positively impact your bottom line.

Contact your Marsh McLennan representative for more specific information about your EMR or safety initiatives and programs available to you.

  • Dan Nyberg – Claims Analyst Lead
  • Lizzy Cronin – Claims Analyst
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